Understanding Financial Accounting

Cover......Page 1
Title Page......Page 5
Copyright......Page 6
Dedication......Page 7
About the Author......Page 8
Preface......Page 9
Acknowledgements......Page 11
Brief Contents......Page 13
Contents......Page 14
Dollar Store Business Is No Small Change......Page 19
What Is Financial Accounting?......Page 21
Who Needs an Understanding of Financial Accounting and Why?......Page 22
What Is a Corporation?......Page 27
What Are the Three Categories of Business Activities?......Page 28
What Are Examples of Financing Activities?......Page 29
What Are Examples of Operating Activities?......Page 30
What Information Is Included in a Set of Financial Statements?......Page 31
What Is the Reporting Objective of the Statement of Income? What Does It Include?......Page 32
What Is the Reporting Objective of the Statement of Changes in Equity? What Does It Include?......Page 35
What Is the Reporting Objective of the Statement of Financial Position? What Does It Include?......Page 36
What Is the Reporting Objective of the Statement of Cash Flows? What Does It Include?......Page 40
What Type of Information Is in the Notes to a Company’s Financial Statements?......Page 42
A Growing Appetite for Financial Transparency......Page 79
Do All Canadian Companies Use the Same Accounting Standards?......Page 81
Who Sets the Accounting Standards Used in Canada?......Page 82
How Do the Standard Setters Determine What Constitutes Useful Financial Information?......Page 83
Accrual Versus Cash Basis of Accounting......Page 86
What Is the Difference between the Cash Basis of Accounting and the Accrual Basis of Accounting?......Page 87
What Is the Accounting Equation Template Approach to Recording Transactions?......Page 88
How Is the Accounting Equation Used to Analyze and Record Transactions?......Page 90
What Are the Limitations of the Accounting Equation Template Approach?......Page 102
How Do We Know if the Company Was Profitable during the Accounting Period?......Page 104
How Do We Determine the Company’s Financial Position at the End of the Accounting Period?......Page 105
How Can We Tell if the Company’s Cash Position Changed during the Accounting Period?......Page 106
Using Ratios to Analyze Financial Statements......Page 108
How Do We Determine How Effective the Company Has Been at Generating a Return on Shareholders’ Equity?......Page 109
How Do We Determine How Effective the Company Has Been at Generating Profits Using Its Assets?......Page 110
Balancing the Books When Bartering......Page 157
How Does the Double-Entry Accounting System Work and How Does It Overcome the Limitations of the Template Method?......Page 159
What Is the Normal Balance Concept and How Is It Used?......Page 160
What Are the Steps in the Accounting Cycle?......Page 163
What Is the Chart of Accounts?......Page 164
What Is the Difference between Permanent and Temporary Accounts?......Page 166
How Are Transactions Recorded in the General Journal?......Page 167
Why Are Transactions Also Recorded in the General Ledger?......Page 174
What Is the Purpose of Preparing a Trial Balance?......Page 175
What Are Adjusting Entries and Why Are They Necessary?......Page 177
What Are Closing Entries and Why Are They Necessary?......Page 182
Expanding the Cast to Bring in the Cash......Page 225
Revenue and Its Significance......Page 226
What Is Revenue and Why Is It of Significance to Users?......Page 227
Revenue Recognition......Page 228
When Are Revenues Recognized?......Page 229
How Do the Right of Returns, Warranties, Consignment, and Third-Party Sale Arrangements Affect Revenue Recognition?......Page 237
Statement of Income Formats......Page 239
How Does a Single-Step Statement of Income Differ from a Multi-Step Statement of Income?......Page 240
What Is Comprehensive Income and How Does It Differ from Net Income?......Page 242
How Does a Statement of Income Presenting Expenses by Function Differ from One Presenting Expenses by Nature of the Items?......Page 243
Financial Statement Analysis......Page 245
What Is Meant by Earnings per Share, and How Is It Calculated?......Page 246
The Dash for Cash......Page 273
How Is “Cash” Defined?......Page 275
Why Is the Statement of Cash Flows of Significance to Users?......Page 276
How Does the Statement of Cash Flows Differ from the Statement of Income?......Page 277
What Are the Categories of Cash Flows Presented in the Statement of Cash Flows and What Are Typical Transactions Included in Each Category?......Page 279
Why Is So Much Significance Placed on Cash Flows from Operating Activities?......Page 280
What Is the Difference between the Direct and Indirect Methods of Preparing Cash Flows from Operating Activities?......Page 281
What Are the Options for Classifying Cash Flows Related to Interest and Dividends Paid and Received?......Page 282
Are There Investing and Financing Activities That Do Not Appear on the Statement of Cash Flows?......Page 283
How Is a Statement of Cash Flows Prepared Using the Indirect Method for Operating Activities?......Page 284
How Is a Statement of Cash Flows Prepared Using the Direct Method for Operating Activities?......Page 294
How Can the Information Presented in a Statement of Cash Flows Be Used to Manage a Company?......Page 297
What Can Cash Flow Patterns Tell Us?......Page 299
How Do We Determine What Portion of a Company’s Liabilities Could Be Met with Cash Flows from Operating Activities?......Page 301
How Do We Determine How Much Net Free Cash Flow a Company Generates?......Page 302
Will That Be Cash or Credit?......Page 351
Why Are Cash and Accounts Receivable of Significance to Users?......Page 353
Who Is Responsible for an Organization’s Internal Controls?......Page 354
What Are the Main Principles of Internal Control?......Page 355
What Is the Purpose of a Bank Reconciliation and Why Must It Be Prepared?......Page 357
How Is a Bank Reconciliation Prepared?......Page 358
Why Do Companies Sell on Account?......Page 362
Are There Any Additional Costs from Selling on Account?......Page 363
At What Amount Are Accounts Receivable Reflected on the Statement of Financial Position?......Page 364
What Is the Allowance Method of Accounting for Bad Debts?......Page 366
How Are Bad Debts Estimated under the Allowance Method?......Page 369
What Is the Direct Writeoff Method and When Is It Acceptable to Use It?......Page 373
How Do Companies Shorten Their Cash-to-Cash Cycle?......Page 374
What Is Liquidity and How Is It Assessed?......Page 376
How Effective Has the Company Been at Collecting Its Accounts Receivable?......Page 378
Mini Cars; Maxi Inventories......Page 411
What Is Inventory?......Page 413
Why Is Inventory of Significance to Users?......Page 414
What Are the Major Classifications of Inventory?......Page 415
What Goods Are Included in a Company’s Inventory?......Page 416
Inventory Systems......Page 417
What Is a Periodic Inventory System?......Page 418
What Is a Perpetual Inventory System?......Page 419
How Does Management Decide Which Inventory System to Use?......Page 421
What Are Cost Formulas and Why Are They Necessary?......Page 423
How Are Cost of Goods Sold and Ending Inventory Determined Using the Specific Identification, Weighted-Average, and First-In, First-Out Cost Formulas under a Perpetual Inventory System?......Page 426
How Do Companies Determine Which Cost Formula to Use?......Page 428
Inventory Valuation......Page 429
At What Value Is Inventory Reflected on the Statement of Financial Position?......Page 430
What Types of Inventory Valuation Errors Can Happen and What Impact Do They Have on the Financial Statements?......Page 431
What Is Gross Margin and Why Is It a Key Measure?......Page 432
Internal Controls and Inventory......Page 433
What Principles of Internal Control Can Be Applied to Inventory?......Page 434
How Often Does the Company Sell through Its Inventory?......Page 435
How Many Days Did It Take to Sell through the Company’s Inventory?......Page 436
How Can Inventory Amounts Be Estimated?......Page 437
How Are Cost of Goods Sold and Ending Inventory Determined Using the Specific Identification, Weighted-Average, and First-In, First-Out Cost Formulas under a Periodic Inventory System?......Page 438
A Canadian Icon’s Long-Term Assets......Page 471
What Are the Various Types of Long-Term Assets?......Page 473
Why Are Long-Term Assets of Significance to Users?......Page 474
At What Amount Are Property, Plant, and Equipment Reflected on the Statement of Financial Position?......Page 475
What Happens When a Company Purchases Multiple Assets for a Single Price?......Page 476
How Do We Account for Costs Subsequent to Purchase?......Page 477
Why Do We Depreciate Property, Plant, and Equipment?......Page 478
What Are the Methods Used to Depreciate Property, Plant, and Equipment?......Page 479
How Do We Record Depreciation Expense?......Page 486
How Do We Determine Depreciation for Partial Periods?......Page 487
Does the Choice of Depreciation Method Affect Corporate Income Taxes?......Page 488
Can We Change Depreciation Estimates and Methods?......Page 489
What Does It Mean If an Asset Is Impaired?......Page 492
How Do We Account for Disposals of Property, Plant, and Equipment?......Page 493
What Are Intangible Assets?......Page 495
At What Amount Are Intangible Assets Reflected on the Statement of Financial Position?......Page 497
What Is Goodwill?......Page 498
How Is Goodwill Treated Differently from Other Long-Term Assets?......Page 500
How Do We Determine the Relative Age of the Company’s Long-Term Assets?......Page 501
How Do We Assess How Effectively the Company Has Used Its Long-Term Assets?......Page 502
Customer Loyalty Is in the Books......Page 527
Why Is the Distinction between Current and Non-Current Liabilities of Significance to Users?......Page 529
Current Liabilities Arising from Transactions with Lenders......Page 530
What Current Liabilities Arise from Transactions with Lenders?......Page 531
Why Are Accounts Payable Sometimes Considered “Free Debt”?......Page 534
How Are Unearned Revenues Accounted for?......Page 535
How Are the Liabilities Related to Gift Cards Accounted for?......Page 537
How Are the Liabilities Related to Loyalty Programs Accounted for?......Page 538
How Are Warranties Accounted for?......Page 540
What Current Liabilities Arise from Transactions with Employees?......Page 542
How Are Payroll Costs Accounted for?......Page 543
Why Are a Company’s Wage Costs Greater Than What It Pays Its Employees?......Page 545
When Are a Company’s Taxes Due?......Page 546
Financial Statement Analysis......Page 547
How Do We Determine How Long a Company Takes to Pay Its Suppliers?......Page 548
Avoiding Pension Turbulence......Page 581
Why Are Long-Term Liabilities of Significance to Users?......Page 583
How Are Long-Term Loans and Mortgages Accounted for?......Page 584
What Are Bonds and How Do They Differ from Long-Term Loans?......Page 588
How Are Bonds Priced in the Marketplace?......Page 590
How Does the Pricing of Bonds Affect a Company’s Interest Expense?......Page 592
Why Do Companies Lease Capital Assets?......Page 594
How Are Leases Accounted for?......Page 595
What Long-Term Liabilities Arise from Transactions with Employees?......Page 596
What Are the Differences between Defined Contribution, Defined Benefit, and Hybrid Pension Plans?......Page 597
What Are Other Post-Employment Benefits?......Page 600
What Long-Term Liabilities Arise as a Result  of Differences between Accounting Standards and the Income Tax Act?......Page 601
How Are Contractual Commitments and Guarantees Reflected in the Financial Statements?......Page 602
What Are Contingent Liabilities and How Are They Accounted for?......Page 603
How Do Users Assess a Company’s Degree of Leverage?......Page 605
How Do Users Assess a Company’s Ability to Service Its Long-Term Debt Obligations?......Page 607
Investors Warm up to Owning Shares in Canada Goose......Page 651
What Is Included in the Shareholders’ Equity Section of the Statement of Financial Position?......Page 653
What Types of Shares Is a Company Allowed to Issue?......Page 656
Why Would a Company Repurchase Its Own Shares?......Page 657
What Are the Differences between Common and Preferred Shares?......Page 658
Do Companies Have to Pay Dividends?......Page 667
What Are the Different Dates Involved in Declaring and Paying a Dividend?......Page 668
How Are the Declaration and Payment of Dividends Recorded?......Page 669
What Is the Difference between a Cash Dividend and a Stock Dividend?......Page 670
Why Would a Company Split Its Shares?......Page 673
What Is the Price/Earnings Ratio?......Page 675
What Other Ratios Measure the Return the Shareholders Are Earning?......Page 676
What Are the Advantages and Disadvantages of Financing with Equity?......Page 678
Student Stock Analysts Try to “Beat the Street”......Page 719
What Is Financial Statement Analysis?......Page 721
What Is the Process for Analyzing Financial Statements?......Page 722
Why Is an Understanding of Context Essential to the Analysis?......Page 723
Why Is It Essential to Understand the Business Being Analyzed?......Page 724
What Information Is the Financial Statement Analysis Based on and Where Is It Found?......Page 725
What Is the Difference between Trend Analysis and Cross-Sectional Analysis?......Page 729
What Is Common-Size Analysis?......Page 734
How Is Ratio Analysis Used to Analyze Financial Statements?......Page 735
What Are the Common Categories of Ratios?......Page 736
What Liquidity Ratios Are Commonly Used?......Page 739
What Activity Ratios Are Commonly Used?......Page 740
What Solvency Ratios Are Commonly Used?......Page 744
What Profitability Ratios Are Commonly Used?......Page 747
What Equity Analysis Ratios Are Commonly Used?......Page 749
What Are the Limitations of Ratio Analysis?......Page 753
What Non-IFRS Financial Measures and Industry Metrics Are Commonly Used by Investors?......Page 754
Why Should We Be Cautious When Using Non-IFRS Financial Measures and Industry Metrics?......Page 755
APPENDIX A Specimen Financial Statements: Dollarama Inc.......Page 801
GLOSSARY......Page 825
COMPANY INDEX......Page 835
SUBJECT INDEX......Page 837
EULA......Page 844